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Supplying Principles and Practices > USPS Supplying Practices Process Step 2: Evaluate Sources > Conduct Spend Analysis
Conduct Spend Analysis
Spend analysis is the process of collecting, refining, and analyzing spend
data. The purpose of a spend analysis is to identify:
• How much the Postal Service/Client is spending
• Category of spend
• Potential savings
Spend analyses are used to support a wide range of activities, from strategic
sourcing to budgeting and planning. Sufficient visibility and analysis of
spending information broaden the Postal Service's ability to:
• Understand spending patterns
• Maximize buying leverage
• Execute informed sourcing and supply management decisions
• Optimize budgeting and planning
• Measure the impact of changes in cost, inflation, economic
conditions, etc.
An initial estimate of how much the Client organization is spending and how
much spending is planned to take place must be made before the spend
analysis process can begin. This can help in the development of opportunity
assessments for future projects or investments.
When spend analysis is overlooked or executed on an ad hoc basis, it can
result not only in highly fragmented buying strategies that fail to fully leverage
the Postal Service's purchasing power, but also in misguided purchase
decisions and missed opportunities for cost savings.
The historical spend analysis provides an effective tool for consolidating
enterprise-wide data, establishing baselines, and anchoring strategic
sourcing decisions. The five processes required for effective spend analysis
are represented in Figure 2.6.
Figure 2.6
Spend Analysis Process
Spend information from the Client organization needs to be defined and
gathered to begin the spend analysis process. Data collection can be a large
effort, depending on the level of sophistication, usage, and degree of
integration of the back-office systems.
Typical data elements required to understand the spend analysis include:
• Purchasing organization
• Supplier name and number
• Category name and code
• Commodity name and code
• Spend amount
• Quantity
• Number of purchase orders, deliveries, and invoices
• Contract number
• Purchase and invoice transaction types
Typical sources of spend data include:
• Relevant information systems (e.g., Finance, including accounts
payable, supplier master file; Purchasing, such as Corporate
Supply Management Open Strategy [COSMOS]; and Supply
Management [SM] Operations, such as Material Distribution
Inventory Management System [MDIMS])
• Purchase card management reports
• Manual systems (e.g., spreadsheets)
• Hard-copy invoices, purchase orders, and contracts
• Stakeholder interviews
• Supplier interviews
Reviewing an item's purchase history is another sound source of previous
spending data. Purchase histories contribute to the development of a clear
understanding of the existing purchasing process while providing an
opportunity to determine whether any steps require modification or
elimination. Some benefits of reviewing purchase histories include:
• Tracking orders from point of sale to delivery
• Controlling inventory discrepancies and late orders
• Determining the extent to which suppliers can lower prices
• Improving the quality and timeliness of the delivered product or
service
When reviewing item purchase histories, it is also important to consider:
• Market research
• Product description
• Order tracking
The primary objectives of reviewing the item's purchase history are:
• Determine whether to renew contract(s) with an existing supplier
or switch to a new supplier
• Evaluate whether products or services that were purchased met
specific Postal Service needs
Use of purchase history data is as simple as obtaining them, because the
information can be found anywhere from contract files to reports of contract
awards. The Purchase/SCM Team can look back at products and services
purchased in the past from a given supplier, review the terms and conditions
of previous contracts awarded, and compare pricing information to determine
whether any changes or modifications need to be made in the future.
The Purchase/SCM Team must ensure that data files are accurate and
complete before classifying or analyzing spend information. Validation is
performed by checking results with relevant stakeholders and suppliers.
Comparing historical spend by purchasing organization to current year spend
budgets provides an excellent check of analysis integrity. As necessary,
Purchase/SCM Teams can adjust data, fill in gaps, and agree on priorities for
further investigation. The ability to reconcile the spend analysis with the
current budget is critical to building credibility with customers and measuring
results.
Because data are typically collected from multiple sources, they must be
reviewed to eliminate duplicates. To this end, the Postal Service rationalizes
and classifies spending data elements and attributes.
Typical cleansing needs that should be noted include:
• Supplier names are spelled differently and thus treated as
different suppliers (e.g., GE, G.E., Gen. Elec., and General
Electric)
• Parent-subsidiary relationships are not captured, and the
company is treated as different companies (e.g., Time Warner vs.
America Online, Inc. vs. Netscape)
• Recent mergers or acquisitions among suppliers or company
name changes are not captured and thus treated separately (e.g.,
Southern Bell Company vs. GTE)
Tasks that are evident in this process include compiling data into database
tools, categorizing purchased items, identifying gaps and inconsistencies,
and producing high-level spend baseline and priority listings.
Each system containing purchasing data likely uses different data structures
and nomenclature by item, commodity, category, and supplier. As a result,
after the data are refined, they should then be classified to remove errors and
inconsistencies and to create a standard language for useful analysis.
Examples of classification schemes include:
• Aligning the dates of spend data
• Converting to common currency
• Assigning and/or correcting common category classifications and
associated commodity names
• Accounting for divested or discontinued businesses
• Accounting for future capital expenditures and other investments
This analysis requires consolidation of data from multiple sources and varied
formats into structured and manageable database(s).
Data must be analyzed across each dimension (e.g., product, supplier,
location). Spend data is analyzed to help understand:
• What is the baseline for the entire Postal Service or Category
Management Center (CMC)?
• What proportion of spend is within the scope of the particular
purchase being considered?
• Are there components of spend that can be targeted for price
reduction or savings?
• What portions of spend are for direct, indirect, and capital
purposes?
To make effective use of spend information, various employees within the
Postal Service, from commodity managers to financial managers, must be
able to access and analyze the information, using advanced reporting and
analytical tools.
Based on validated spend analysis, the Purchase/SCM Team should
compare findings against initial estimates and refine the opportunity
assessment. Doing so may reveal opportunities to:
• Rationalize suppliers and items
• Consolidate spending across business units and geography
• Identify purchase price variances (PPVs)
• Improve contract compliance
• Increase diversity expenditure
Conduct Market Research and Benchmarking Analysis topic, Decide on
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